ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “potential,” “intend,” “project,” “estimate,” and other similar expressions. These forward-looking statements involve risks and uncertainties, and may include assumptions as to how we may perform in the future. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions about future events that may not prove to be accurate. Therefore, our actual results may differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”), as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in the Annual Report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Overview
We are a global commerce solutions company. We manage the entire customer shopping experience for major branded manufacturers and retailers through two business segments, LiveArea Professional Services and PFS Operations. The LiveArea Professional Services segment provides services to support and improve the digital experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services. The PFS Operations segment provides services to support and improve the physical experience, such as order management, order fulfillment, customer care and payment services. We offer our services on an a la carte basis or as a complete end-to-end solution.
Service Fee Model. We refer to our standard seller services financial model as the Service Fee model. In this model, our clients own the inventory and are the merchants of record and engage us to provide various infrastructure, technology and digital agency services in support of their business operations. We offer our services as an integrated solution, which enables our clients to outsource their complete eCommerce needs to a single source and to focus on their core competencies, though clients are also able to select individual or groupings of our various service offerings on an à la carte basis. We currently provide services to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, coins and collectibles, apparel, telecommunications, consumer electronics and consumer packaged goods, among others.
In the Service Fee model, we typically charge for our services on time and material basis, a cost-plus basis, a percent of shipped revenue basis, a time and materials, project or retainer basis for our professional services or a per transaction basis, such as a per labor hour basis for web-enabled customer contact center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors, including the depth and complexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors who provide additional services, such as package delivery. The costs we are charged by these third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these costs and other ‘out-of-pocket’ expenses include travel, shipping and handling costs and telecommunication charges and are included in pass-through revenue.
Agent (Flash) Model. In our PFS Operations business unit, as an additional service, we offer the Agent, or Flash, financial model, in which our clients maintain ownership of the product inventory stored at our locations as in the Service Fee model. When a customer orders the product from our clients, a “flash” sale transaction passes product ownership to us for each order and we in turn immediately re-sell the product to the customer. The “flash” ownership exchange establishes us as the merchant of record, which enables us to use our existing merchant infrastructure to process sales to end customers, removing the need for the clients to establish these business processes internally, but permitting them to control the sales process to end customers. In this model, based on the terms of our current client arrangements, we record product revenue net of cost of product revenue as a component of service fee revenue in our condensed consolidated statement of operations.
Retail Model. Our PFS Operations business unit also provides a Retail model which allows us to purchase inventory from the client. We place the initial and replenishment purchase orders with the client and take ownership of the product either upon shipment to or delivery to our facility. In this model, depending on the terms of our client arrangements, we may own the inventory and the accounts receivable arising from our product sales. Under the Retail model, depending upon the product category and sales characteristics, we may require the client to provide product price protection as well as product purchase payment terms, right of return, and obsolescence protection appropriate to the product sales profile. Depending on the terms of our client arrangements in the Retail model, we record in our condensed consolidated statement of operations either: 1) product revenue as a component of product revenue, or 2) product revenue net of cost of product revenue as a component of service fee revenue. In general, we seek to structure client relationships in our Retail model under the net revenue approach to more closely align with our service fee revenue financial presentation and mitigate inventory ownership risk, although we have one client still operating under the gross revenue approach. Freight costs billed to customers are reflected as components of product revenue. This business model generally requires significant working capital, for which we have credit available either through credit terms provided by our clients or under senior credit facilities.
Currently, we are targeting growth within our Retail model to be through relationships with clients under which we can record service fee revenue in our condensed consolidated statement of operations. These relationships are often driven by the sales and marketing efforts of the manufacturers and third-party sales partners. In addition, as a result of certain operational restructuring of its business, our primary client relationship operating in the Retail model, Ricoh, has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced product revenues and profitability under our Retail model.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our company is driven by two main elements: new client relationships and organic growth from existing clients. Within our LiveArea Professional Services segment, we focus our sales efforts on engaging with brands, retailers and manufacturers to perform discrete projects such as website design, platform selection and platform implementation and system integration projects. We also focus our LiveArea sales efforts on engaging with brands, retailers and manufacturers to provide ongoing services such as digital marketing retainers and technology managed services engagements. Within our PFS Operations segment, we focus our sales efforts on larger contracts with brand-name companies within four primary target markets, health and beauty, home goods and collectibles, fashion, and consumer packaged goods. Consumer packaged goods require a longer duration to close but also have the potential to be higher quality and longer duration engagements. Within both segments, we focus our sales efforts on both new clients and also on existing clients where we believe opportunity exists to expand a client relationship to include additional services within the segment, across segments and/or across multiple geographies. We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield incremental gross profit, we also expect to incur incremental investments in technology development, operational and support management and sales and marketing expenses to help generate growth.
Our expenses comprise primarily four categories: 1) cost of service fee revenue, 2) cost of product revenue, 3) cost of pass-through revenue and 4) selling, general and administrative expenses.
Cost of service fee revenue - consists primarily of compensation and related expenses for our web-enabled customer contact center services, fulfillment and distribution services and professional, digital agency and technology services, and other fixed and variable expenses directly related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and amortization expenses.
Cost of product revenue - consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. These reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses as defined under the distributor agreements.
Cost of pass-through revenue - the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue.
Selling, General and Administrative expenses - consist of expenses such as compensation and related expenses for sales and marketing staff, distribution costs (excluding freight) applicable to the Agent and the Retail model, executive, management and administrative personnel and other overhead costs, including certain occupancy and information technology costs, certain depreciation and amortization expenses and acquisition related, restructuring and other costs.
Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions are important components of financing current operations and our targeted growth.
Operating Results
The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenues (in thousands, except percentages):
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended
September 30,
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% of Total
Revenues
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Nine Months Ended
September 30,
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% of Total
Revenues
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2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
49,602
|
|
|
$
|
52,890
|
|
|
$
|
(3,288
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)
|
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73.0
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%
|
|
68.1
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%
|
|
$
|
151,371
|
|
|
$
|
162,519
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|
|
$
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(11,148
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)
|
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72.5
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%
|
|
69.7
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%
|
Product revenue, net
|
6,579
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|
|
8,469
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|
(1,890
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)
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9.7
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%
|
|
10.9
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%
|
|
20,216
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|
27,081
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(6,865
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)
|
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9.7
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%
|
|
11.6
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%
|
Pass-through revenue
|
11,810
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|
|
16,342
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|
|
(4,532
|
)
|
|
17.4
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%
|
|
21.0
|
%
|
|
37,063
|
|
|
43,573
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|
|
(6,510
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)
|
|
17.8
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%
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|
18.7
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%
|
Total revenues
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67,991
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|
|
77,701
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|
(9,710
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)
|
|
100.0
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%
|
|
100.0
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%
|
|
208,650
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|
|
233,173
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|
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(24,523
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)
|
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100.0
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%
|
|
100.0
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%
|
Costs of Revenues
|
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|
|
|
|
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|
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|
|
|
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Cost of service fee
revenue
|
32,296
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|
33,576
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(1,280
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)
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65.1
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%
|
(1)
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63.5
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%
|
|
99,062
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|
|
102,478
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|
|
(3,416
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)
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|
65.4
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%
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(1)
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63.1
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%
|
Cost of product revenue
|
6,250
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|
|
8,099
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|
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(1,849
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)
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95.0
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%
|
(2)
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95.6
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%
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19,117
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|
|
25,819
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|
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(6,702
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)
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|
94.6
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%
|
(2)
|
95.3
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%
|
Cost of pass-through
revenue
|
11,810
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|
|
16,342
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|
|
(4,532
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)
|
|
100.0
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%
|
(3)
|
100.0
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%
|
|
37,063
|
|
|
43,573
|
|
|
(6,510
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)
|
|
100.0
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%
|
(3)
|
100.0
|
%
|
Total costs of revenues
|
50,356
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|
|
58,017
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|
|
(7,661
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)
|
|
74.1
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%
|
|
74.7
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%
|
|
155,242
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|
|
171,870
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|
|
(16,628
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)
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|
74.4
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%
|
|
73.7
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%
|
Service fee gross
profit
|
17,306
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|
|
19,314
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|
|
(2,008
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)
|
|
34.9
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%
|
(1)
|
36.5
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%
|
|
52,309
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|
|
60,041
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|
|
(7,732
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)
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|
34.6
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%
|
(1)
|
36.9
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%
|
Product revenue gross
profit
|
329
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|
|
370
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|
|
(41
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)
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|
5.0
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%
|
(2)
|
4.4
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%
|
|
1,099
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|
|
1,262
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|
|
(163
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)
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5.4
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%
|
(2)
|
4.7
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%
|
Total gross profit
|
17,635
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|
|
19,684
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|
|
(2,049
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)
|
|
25.9
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%
|
|
25.3
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%
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|
53,408
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|
|
61,303
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|
|
(7,895
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)
|
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25.6
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%
|
|
26.3
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%
|
Selling, General and
Administrative expenses
|
18,886
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|
|
19,007
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(121
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)
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|
27.8
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%
|
|
24.5
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%
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|
55,329
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|
|
59,423
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|
(4,094
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)
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26.5
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%
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|
25.5
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%
|
Income (loss) from
operations
|
(1,251
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)
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|
677
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(1,928
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)
|
|
(1.8
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)%
|
|
0.9
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%
|
|
(1,921
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)
|
|
1,880
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|
|
(3,801
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)
|
|
(0.9
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)%
|
|
0.8
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%
|
Interest expense, net
|
458
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|
|
612
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|
|
(154
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)
|
|
0.7
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%
|
|
0.8
|
%
|
|
1,418
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|
1,802
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(384
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)
|
|
0.7
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%
|
|
0.8
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%
|
Income (loss) before
income taxes
|
(1,709
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)
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|
65
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(1,774
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)
|
|
(2.5
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)%
|
|
0.1
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%
|
|
(3,339
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)
|
|
78
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|
|
(3,417
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)
|
|
(1.6
|
)%
|
|
—
|
%
|
Income tax (benefit) expense, net
|
(71
|
)
|
|
751
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|
|
(822
|
)
|
|
(0.1
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)%
|
|
1.0
|
%
|
|
438
|
|
|
2,140
|
|
|
(1,702
|
)
|
|
0.2
|
%
|
|
0.9
|
%
|
Net loss
|
$
|
(1,638
|
)
|
|
$
|
(686
|
)
|
|
$
|
(952
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)
|
|
(2.4
|
)%
|
|
(0.9
|
)%
|
|
$
|
(3,777
|
)
|
|
$
|
(2,062
|
)
|
|
$
|
(1,715
|
)
|
|
(1.8
|
)%
|
|
(0.9
|
)%
|
(1) Represents the percent of Service fee revenue.
(2) Represents the percent of Product revenue, net.
(3) Represents the percent of Pass-through revenue.
Segment Operating Data
PFS Operations (in thousands, except percentages)
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|
|
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|
|
|
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|
|
|
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|
|
Three Months Ended
September 30,
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|
|
|
|
|
Nine Months Ended
September 30,
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|
|
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|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
31,176
|
|
|
$
|
32,106
|
|
|
$
|
(930
|
)
|
|
(3
|
)%
|
|
$
|
95,930
|
|
|
$
|
100,222
|
|
|
$
|
(4,292
|
)
|
|
(4
|
)%
|
Product revenue, net
|
6,579
|
|
|
8,469
|
|
|
(1,890
|
)
|
|
(22
|
)%
|
|
20,216
|
|
|
27,081
|
|
|
(6,865
|
)
|
|
(25
|
)%
|
Pass-through revenue
|
10,760
|
|
|
15,702
|
|
|
(4,942
|
)
|
|
(31
|
)%
|
|
35,049
|
|
|
42,076
|
|
|
(7,027
|
)
|
|
(17
|
)%
|
Total revenues
|
48,515
|
|
|
56,277
|
|
|
(7,762
|
)
|
|
(14
|
)%
|
|
151,195
|
|
|
169,379
|
|
|
(18,184
|
)
|
|
(11
|
)%
|
Costs of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service fee revenue
|
22,349
|
|
|
22,837
|
|
|
(488
|
)
|
|
(2
|
)%
|
|
69,023
|
|
|
71,135
|
|
|
(2,112
|
)
|
|
(3
|
)%
|
Cost of product revenue
|
6,250
|
|
|
8,099
|
|
|
(1,849
|
)
|
|
(23
|
)%
|
|
19,117
|
|
|
25,819
|
|
|
(6,702
|
)
|
|
(26
|
)%
|
Cost of pass-through revenue
|
10,760
|
|
|
15,702
|
|
|
(4,942
|
)
|
|
(31
|
)%
|
|
35,049
|
|
|
42,076
|
|
|
(7,027
|
)
|
|
(17
|
)%
|
Total costs of revenues
|
39,359
|
|
|
46,638
|
|
|
(7,279
|
)
|
|
(16
|
)%
|
|
123,189
|
|
|
139,030
|
|
|
(15,841
|
)
|
|
(11
|
)%
|
Gross Profit
|
9,156
|
|
|
9,639
|
|
|
(483
|
)
|
|
(5
|
)%
|
|
28,006
|
|
|
30,349
|
|
|
(2,343
|
)
|
|
(8
|
)%
|
Direct operating expenses
|
7,454
|
|
|
6,251
|
|
|
1,203
|
|
|
19
|
%
|
|
21,649
|
|
|
18,724
|
|
|
2,925
|
|
|
16
|
%
|
Direct contribution
|
$
|
1,702
|
|
|
$
|
3,388
|
|
|
$
|
(1,686
|
)
|
|
(50
|
)%
|
|
$
|
6,357
|
|
|
$
|
11,625
|
|
|
$
|
(5,268
|
)
|
|
(45
|
)%
|
PFS Operations total revenues for the three and nine months ended September 30, 2019 decreased by $7.8 million and $18.2 million, respectively. compared with the corresponding period in 2018. Service fee revenue for the three and nine months ended September 30, 2019 decreased $0.9 million and $4.3 million, respectively, compared to the prior year. The service fee revenue decline was primarily due to reduced revenue as a result of client bankruptcy, which accounted for $2.1 million and $5.8 million of the decrease during the three and nine month periods, as well as the impact of certain client terminations, partially offset by growth from new and existing clients.
Product revenue, net, for the three and nine months ended September 30, 2019, decreased by $1.9 million and $6.9 million, respectively, compared to the corresponding period in 2018 due to the revenue stream being primarily dependent on one client, which restructured its operations and discontinued certain product lines which has resulted, and is expected to continue to result, in reduced product revenue activity.
Pass-through revenue decreased by $4.9 million and $7.0 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to a client transitioning their freight activity to a direct carrier relationship as well as the impact of client terminations, partially offset by growth from new and existing clients.
PFS Operations gross margin increased to 18.9% for the three months ended September 30, 2019 as compared to 17.1% the same period of the prior year. PFS Operations gross margin increased slightly to 18.5% for the nine months ended September 30, 2019 as compared to 17.9% in the same period of the prior year. The increased margin in the three and nine month periods is primarily due the impact from reduced product revenue activity, which is conducted at a lower gross margin. This was partially offset by lower gross margin on service fee revenue activity as a result of a higher percentage of such activity being generated from lower margin fulfillment related services.
Direct operating expenses increased by $1.2 million and $2.9 million for the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The increase was primarily due to increased sales and marketing costs and facility related costs, and for the nine month period a higher provision for doubtful accounts due to a client bankruptcy, partially offset by other cost reductions.
LiveArea Professional Services (in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
18,426
|
|
|
$
|
20,784
|
|
|
$
|
(2,358
|
)
|
|
(11
|
)%
|
|
$
|
55,441
|
|
|
$
|
62,297
|
|
|
$
|
(6,856
|
)
|
|
(11
|
)%
|
Pass-through revenue
|
1,050
|
|
|
640
|
|
|
410
|
|
|
64
|
%
|
|
2,014
|
|
|
1,497
|
|
|
517
|
|
|
35
|
%
|
Total revenues
|
19,476
|
|
|
21,424
|
|
|
(1,948
|
)
|
|
(9
|
)%
|
|
57,455
|
|
|
63,794
|
|
|
(6,339
|
)
|
|
(10
|
)%
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service fee revenue
|
9,947
|
|
|
10,739
|
|
|
(792
|
)
|
|
(7
|
)%
|
|
30,039
|
|
|
31,343
|
|
|
(1,304
|
)
|
|
(4
|
)%
|
Cost of pass-through revenue
|
1,050
|
|
|
640
|
|
|
410
|
|
|
64
|
%
|
|
2,014
|
|
|
1,497
|
|
|
517
|
|
|
35
|
%
|
Total costs of revenues
|
10,997
|
|
|
11,379
|
|
|
(382
|
)
|
|
(3
|
)%
|
|
32,053
|
|
|
32,840
|
|
|
(787
|
)
|
|
(2
|
)%
|
Gross profit
|
8,479
|
|
|
10,045
|
|
|
(1,566
|
)
|
|
(16
|
)%
|
|
25,402
|
|
|
30,954
|
|
|
(5,552
|
)
|
|
(18
|
)%
|
Direct operating expenses
|
5,885
|
|
|
6,575
|
|
|
(690
|
)
|
|
(10
|
)%
|
|
18,634
|
|
|
23,487
|
|
|
(4,853
|
)
|
|
(21
|
)%
|
Direct contribution
|
$
|
2,594
|
|
|
$
|
3,470
|
|
|
$
|
(876
|
)
|
|
(25
|
)%
|
|
$
|
6,768
|
|
|
$
|
7,467
|
|
|
$
|
(699
|
)
|
|
(9
|
)%
|
LiveArea Professional Services revenues for the three and nine months ended September 30, 2019 decreased by $1.9 million and $6.3 million, respectively, compared to the corresponding periods in 2018. The decrease in revenues are primarily due to reduced technology services project activity, as well as client terminations. We expect this trend of lower period over period sales to continue for the remainder of 2019 as we work to rebuild the sales pipeline.
LiveArea Professional Services gross margin decreased to 43.5% from 46.9% in the three months ended September 30, 2019 and decreased to 44.2% from 48.5% in the nine months ended September 30, 2019, compared to the corresponding periods of the prior year. The decrease in gross margin is primarily attributable to increased labor costs, including higher than expected costs incurred on certain client projects. The LiveArea Professional Services revenue and gross margin in the three and nine months ended September 30, 2019, were partially impacted by increased monies earned on direct and indirect technology related product sales.
Direct operating expenses decreased by $0.7 million and $4.9 million for the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The decrease was primarily attributable to our cost reduction efforts in response to lower revenues with a reduction in non-billable personnel related costs as well as a reduction in amortization of intangible assets.
Corporate (in thousands, except percentages)
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended
September 30,
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
|
2019
|
|
2018
|
|
Change
|
|
Change %
|
Unallocated corporate expenses
|
$
|
5,547
|
|
|
$
|
6,181
|
|
|
$
|
(634
|
)
|
|
(10
|
)%
|
|
$
|
15,046
|
|
|
$
|
17,212
|
|
|
$
|
(2,166
|
)
|
|
(13
|
)%
|
Unallocated corporate expenses decreased by $0.6 million and $2.2 million for the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The decrease for the three month period was primarily due to reduced restructuring and other costs. The nine month period was further impacted by a decrease in tax related costs.
Income Taxes
During the three months ended September 30, 2019, we recorded a tax benefit of $0.1 million comprised primarily of $0.3 million related to the majority of our international operations, a provision of $0.1 million related to state income taxes, and a provision of $0.1 million associated with the tax amortization of goodwill relation to our 2015 acquisition. A valuation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, and for certain foreign deferred tax assets.
During the nine months ended September 30, 2019, we recorded a tax provision of $0.4 million comprised primarily of a benefit of $0.2 million related to the majority of our international operations, a provision of $0.2 million related to state income taxes, and a provision of $0.4 million associated with the tax amortization of goodwill relation to our 2015 acquisition. A valuation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, and for certain foreign deferred tax assets.
For the three and nine months ended September 30, 2019 and 2018, we have utilized the discrete effective tax rate method, as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes—Interim Reporting,” to calculate its interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. We believe that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as (i) the estimated annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual pretax earnings and (ii) our ongoing assessment that the recoverability of our deferred tax assets is not likely in several jurisdictions.
Liquidity and Capital Resources
We currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our presently known operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to our subsidiaries, if necessary, for at least the next twelve months.
Our cash position decreased in the nine months ended September 30, 2019 primarily from payments on our outstanding debt obligations as well as capital expenditures, partially offset by cash provided by operating activities.
Cash Flows from Operating Activities
During the nine months ended September 30, 2019, net cash provided by operations was $12.0 million, compared to $10.5 million in the same period of the prior year, which consisted primarily of cash income from operations before net working capital changes. Cash flow benefits from operating activities for both periods also arose from favorable changes in operating assets and liabilities partially due to timing of collections and payment activity.
Cash Flows from Investing Activities
Cash used in investing activities included capital expenditures of $3.2 million and $3.9 million during the nine months ended September 30, 2019 and 2018, respectively, exclusive of property and equipment acquired under debt and finance lease financing, which consisted primarily of capitalized software costs and equipment purchases.
Capital expenditures have historically consisted of additions to upgrade our management information systems, development of customized technology solutions to support and integrate with our service fee clients and general expansion and upgrades to our facilities, both domestic and foreign. We expect to incur capital expenditures to support new contracts and anticipated future growth opportunities. Based on our current client business activity and our targeted growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology solutions and services for the upcoming twelve months, including costs to implement new clients, will be approximately $7.0 million to $10.0 million, although additional capital expenditures may be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of these expenditures may be financed through client reimbursements, debt, operating or finance leases or additional equity. We may elect to modify or defer a portion of such anticipated investments in the event that we do not obtain the financing results necessary to support such investments.
Cash Flows from Financing Activities
During the nine months ended September 30, 2019 and 2018, cash used in financing activities was $10.4 million and $10.6 million, respectively, which are primarily due to reductions in on our debt and finance lease obligations.
Working Capital
During the nine months ended September 30, 2019, our working capital decreased to $10.3 million as of September 30, 2019 compared to $22.9 million at December 31, 2018. This decrease was primarily related to our adoption of ASC 842 and the inclusion of approximately $8.5 million in operating lease liabilities that were not included in the prior year, as well as the reduction of our debt from cash provided by operations.
To obtain additional financing in the future, in addition to our current cash position, we plan to evaluate various financing alternatives including the sale of equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding our current credit facilities or entering into new debt agreements. No assurances can be given we will be successful in obtaining any additional financing or the terms thereof. We currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our presently known operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to our subsidiaries, if necessary, for at least the next twelve months.
Our term and revolving loan facilities described below contain both financial and non-financial covenants. To the extent we fail to comply with our debt covenants, including the financial covenant requirements, and we are not able to obtain a waiver, the lenders would be entitled to accelerate the repayment of any outstanding credit facility obligations, and exercise all other rights and remedies, including sale of collateral. An acceleration of the repayment of our credit facility obligations may have a material adverse impact on our financial condition and results of operations. We can provide no assurance we will have the financial ability to repay all such obligations. As of September 30, 2019, we were in compliance with all debt covenants. Further, non-renewal of any of our credit facilities may have a material adverse impact on our business and financial condition.
Inventory Financing
To finance its distribution of Ricoh products in the U.S., Supplies Distributors has a short-term credit facility with IBM Credit LLC and its assignees (“IBM Credit”) that provides financing for eligible inventory and certain receivables for up to $11.0 million. We have provided a collateralized guarantee to secure the repayment of this credit facility. The IBM Credit facility does not have a stated maturity and both parties have the ability to exit the facility following a 90-day notice.
This credit facility contains various restrictions upon the ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well as financial covenants, such as annualized revenue to working capital, net profit after tax to revenue and total liabilities to tangible net worth, as defined, and are secured by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, we are required to maintain a subordinated loan to Supplies Distributors of no less than $1.0 million, not maintain restricted cash of more than $5.0 million, are restricted with regard to transactions with related parties, indebtedness and changes to capital stock ownership. Furthermore, we are obligated to repay any over-advance made to Supplies Distributors or its subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee of substantially all of the obligations of Supplies Distributors and its subsidiaries to IBM and Ricoh.
Debt and Capital Lease Obligations
U.S. Credit Agreement. In August 2015, we entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself and one or more future lenders (the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders provided us with a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million. Borrowings under the Credit Agreement accrued interest at a variable rate based on prime rate or Libor, plus an applicable margin.
On November 1, 2018, we entered into Amendment No. 1 to our credit agreement with Regions Bank (the “Amended Facility”). The Amended Facility provided for an increase in availability of our revolving loans to $60.0 million, with the ability for a further increase of $20.0 million to $80.0 million, and the elimination of the term loan. Amounts outstanding under the term loan were reconstituted as revolving loans. The Amended Facility also extends the maturity date to November 1, 2023.
In accordance with ASC 470, Debt (“ASC 470”), we recorded a $0.1 million loss on early extinguishment of debt in 2018 related to the Amended Facility.
As of September 30, 2019 and December 31, 2018, the weighted average interest rate on the revolving loan facility was 4.40% and 4.57%, respectively. The Amended Facility is secured by a lien on substantially all of the operating assets of the US entities and a pledge of 65% of the shares of certain of our foreign subsidiaries. The Amended Facility contains cross default provisions, various restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a maximum consolidated leverage ratio.
Master Lease Agreements. We have various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generally have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.
Other than our finance and operating lease commitments, we do not have any other material financial commitments, although future client contracts may require capital expenditures and lease commitments to support the services provided to such clients.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.